Judgment:Civil
Appeal No. 1873 OF 2007 (Arising out of S.L.P. (C) No.13570 of 2006)
S.H. Kapadia, J.-
Leave granted.TA short question
which arises for determination in this civil appeal filed by the
Department: whether payments made by M. K. Shah Exports Pvt. Ltd. (for
short, 'MKSEPL') during the Accounting Year ending 31.3.2000 (Assessment
Year 2000-01) amounting to Rs.5.99 crores was made to the two firms M/s.
M.K. Foundation (for short, 'MKF') and M/s. M.K. Industries (for short,
'MKI') for the benefit of respondent-assessee herein, Mukundrai K. Shah.

Department sought to tax the said amount of
Rs.5.99 crores as undisclosed income in the hands of the
assessee. On 24.8.2000, the Department searched the
premises of the assessee under Section 132 of Income
Tax Act, 1961(for short, 'the Act'). During the search
apart from cash and jewellery a diary titled "ML-20" was
seized. On 16.11.2000, during the search the statement
of Kalpesh Shah, son of the assessee, was also recorded
under Section 132(4) of the said Act. Statement of the
assessee was also recorded on that date. The diary
indicated investment of Rs.26.35 crores by the assessee
in 9% RBI Relief Bonds during the accounting year
ending 31.3.2000. By the Assessment Order dated
29.11.2002, the said amount of Rs.5.99 crores was
assessed as a deemed dividend under Section 2(22)(e) of
the said Act. The A.O. took into consideration the
income of the assessee for the block period, under
Chapter XIV-B at Rs.65.77 crores. This was for the block
period 1.4.90 to 24.8.2000 (for short, "block period").

The diary was seized from the premises of MKSEPL. It
belonged to the assessee. The assessee was asked to
explain the sources of investment of Rs.26.35 crores in
purchase of 9% RBI Relief Bonds during Financial Year
1999 2000. The said Bonds were purchased between
17.11.99 and 11.2.2000. The A.O. found that the said
Bonds were purchased from the money received from
MKF and MKI (for short, 'two firms') in which the
assessee was the partner. In the books of account the
said two firms were shown to have received back the
loans and advances from three companies M.K. Tea (P)
Ltd. (for short, 'MKTPL'), Safari Capital (P) Ltd. (for short,
'SCPL') and MKSEPL, which three companies were closely
related companies, in which the assessee had controlling
interest. All three companies were private limited
companies in which the assessee had considerable voting
power. However on the basis of the said diary and the
cash flow chart, the A.O. concluded that Rs.5.99 crores
was paid by MKSEPL (including SCPL) and Rs.94 lakhs
by MKTPL in the Accounting Year 1999-2000 to MKF and
MKI respectively for the purchase of 9% RBI Relief Bonds
by the assessee. In the circumstances, by the
Assessment Order, the Department assessed the said
sum as deemed dividend in the hands of the assessee
under Section 2(22)(e) of the Act. It was held that
MKSEPL, SCPL and MKTPL (for short, 'three companies)
were the companies in which the public was not
substantially interested; that the assessee was one of the
shareholders having more than 10% total voting rights of
MKSEPL and SCPL; that in MKTPL the total shareholding
of the assessee was 9.3% and, therefore, he was not the
beneficial owner of the shares of the said companies. It
was further held by the A.O. that SCPL stood merged
with MKSEPL with effect from 18.5.98. This was by the
Order of the Calcutta High Court dated 5.7.2001.

Therefore, according to the Order of Assessment, the
alleged repayments by MKSEPL including SCPL were not
repayments but they were payments made by MKSEPL
(including SCPL) to MKF and MKI for the individual
benefit of the assessee amounting to Rs.5.99 crores
which was held to be a deemed dividend under Section
2(22)(e) of the Act. Before the A.O. the assessee
contended that during the financial year 1999-2000, his
shareholding in MKTPL was only 9.3% and, therefore, he
was not having substantial interest in the said company;
that similarly he was not having substantial interest in
SCPL in which his shareholding in the F.Y 1999-2000
was only 0.2%; that the assessee was one of the partners
in MKF and MKI and that the said two firms did not have
substantial interest in MKSEPL, SCPL and MKTPL; that
reserves and surplus of MKSEPL cannot be taken as
reserves and surplus of SCPL which was merged with the
company with effect from 18.5.98; that MKI had
advanced loan to SCPL which was repaid; that payment
made by MKSEPL to MKF was through the current
account and that the withdrawal made by the assessee
from the two firms were debited to his capital account in
the books of MKF and MKI and, therefore, the assessee
contended that the said payments were not made to the
said two firms for his individual benefit. These
arguments were rejected by the A.O. It was held that the
assessee had substantial interest in MKSEPL in which
SCPL stood merged with effect from 18.5.98; that there
was no merit in the contention of the assessee that the
two firms, in which he was the partner, were not
beneficial owner of shares of MKSEPL and SCPL; that the
only relevant criteria was whether payments made to the
said two firms was for the individual benefit of the
assessee, who was the shareholder in MKSEPL.

This
point, according to the A.O., became relevant since the
only issue which arose for determination in this case was
the issue of deemed dividend under Section 2(22)(e) of
the Act. According to the A.O., the said two firms MKI
and MKF, were the conduits enabling the assessee to
take out the money from the company by using the said
two firms as conduits. According to the A.O., payment of
Rs.5.99 crores was not made directly to the assessee by
MKSEPL but through the above-mentioned two firms
MKF and MKI. At this stage, it needs to be mentioned
that there is no dispute that 9% RBI Relief Bonds were
purchased by the assessee out of the funds available with
MKI and MKF who in turn were funded by MKSEPL
including SCPL. It is also not in dispute that the
assessee had the majority of the voting power in
MKSEPL. It is not in dispute that the said company,
MKSEPL, had accumulated profits but according to the
A.O. the said company deliberately refused to distribute
the said accumulated profits as dividends to its
shareholders and instead adopted the device of
advancing the said accumulated profits as loan to the
assessee who was the shareholder of the said company.
According to the A.O., it was a device to evade payment of
tax on accumulated profits.

Aggrieved by the Assessment Order dated
29.11.2002, the assessee went in appeal to
Commissioner of Income Tax (Appeals) (for short, 'CIT
(A)') under Section 158BC(c) read with Section 143(3) of
the Act. By the Order dated 21.2.03, it was held by CIT
(A) that the assessee did not possess any substantial
interest in MKTPL or in SCPL during F.Y 1999-2000; that
MKF and MKI had no substantial interest in MKSEPL,
SCPL and MKTPL during F.Y. 1999-2000; that SCPL did
not make any loan to MKI during the financial year 1999-2000; that SCPL had borrowed money from MKI and all
payments made by SCPL during F.Y. 1999-2000 were
repayments of loans advanced by MKI; that the assessee
had 16% share in MKF; that MKSEPL had a current
account in the books of MKF and that in most cases MKF
had advanced loans to MKSEPL. According to CIT(A),

MKSEPL have repaid those loans to MKF in which the
assessee had substantial interest. According to CIT(A),
the nature of transactions between MKF and MKSEPL
consisted of a running account; it consisted of giving of
loans and repayments thereof. According to CIT(A), none
of the two firms had any substantial interest in MKSEPL,
SCPL and MKTPL. According to CIT(A), all withdrawals
made by the assessee from MKF and MKI including the
impugned sum were debited to the assessee's capital
account in the books of MKF and MKI.

According to
CIT(A), MKSEPL and SCPL had a regular account in MKF
and MKI even before the purchase of the said Bonds and
that the said two firms had advanced loans to MKSEPL
and SCPL even in the earlier years as well as in the
financial year 1999-2000 and, therefore, there was no
motive in the debtor companies repaying their debts to
MKF and MKI. According to CIT(A), merely because
repayments were made by MKSEPL and SCPL through
MKF and MKI in January/February 2000 and merely
because the said amounts were partly utilized by the said
two firms in making payments to the assessee who
bought 9% RBI Relief Bonds therefrom, did not
necessarily mean that the assessee had routed the funds
of MKSEPL through MKF and MKI for his individual
benefit. According to CIT(A), MKF and MKI were two
separate entities; that there was no material to show that
MKF and MKI were used as conduits for routing the
money from MKSEPL to the assessee. According to
CIT(A), while the total investment made by the assessee
in purchase of Bonds during F.Y. 1999-2000 was
Rs.26.35 crores, the Department has sought to assess
only Rs.5.99 crores as deemed dividend and, therefore,
according to CIT, the allegation made by the A.O. was
baseless.

According to CIT(A) there was no material to
show that MKSEPL and SCPL had made payments to the
said two firms for the benefit of the assessee enabling
him to purchase the said Bonds in F.Y. 1999-2000.
According to CIT(A), MKSEPL and SCPL were the debtors
of MKF and MKI in the regular course of business and,
therefore, payments made by MKSEPL to MKF and MKI
were repayments of loans and that the said payments
were not for purchase of Bonds by the assessee.
Accordingly, the appeal was allowed by CIT(A).

Aggrieved by the decision dated 21.2.03, the matter
was carried in appeal by the Department to the Tribunal.
By the judgment dated 28.1.05, the Tribunal held that in
this case Section 2(22)(e) was attracted since
disbursement was made by MKSEPL (company); that
SCPL had no independent existence in law in
January/February 2000 when payments were made by
MKI and MKF to the assessee who bought the said
Bonds; that SCPL disbursed Rs.2.04 crores and Rs.75
lakhs in January 2000; that SCPL stood merged in
MKSEPL vide Order of the High Court dated 5.7.2001
with retrospective effect, i.e. 18.5.98; that in January
2000 SCPL had no legal existence since the merger had
taken place with effect from 18.5.98; that merger had
taken place under a voluntary scheme in which every
shareholder of the two companies agreed; that, therefore,
there was no merit in the contention of the assessee that
his shareholding in SCPL and the accumulated profits of
SCPL were not liable to be taken into account; according
to the Tribunal, in the aforestated circumstances, all
payments should be taken to have originated from
MKSEPL; the Tribunal further found that the
accumulated reserves of MKSEPL was Rs.55 crores,
nearly ten times in excess of Rs.5.99 crores taxed as
deemed dividend.

It is not in dispute that the assessee
had more than 10% of the total voting power in MKSEPL.
In the circumstances, the Tribunal took the view that
MKSEPL made payment to the said two firms for the benefit of the
assessee who thereafter bought the said
Bonds. According to the Tribunal, MKSEPL was the only
company which made the disbursement through MKF
and MKI. According to the Tribunal, it is true that the
assessee bought the said Bonds for Rs.26.35 crores but
the A.O. had taxed only a fraction of Rs.5.99 crores.
However, according to the Tribunal, for the purposes of
applicability of Section 2(22)(e) of the said Act payment
has to originate from a company. After excluding known
company sources, according to the Tribunal, the A.O.
was right in restricting the deemed dividend amount to
Rs.5.99 crores since known company sources had to be
eliminated. According to the Tribunal, the A.O. was right
in identifying MKSEPL as the originating company, the
identity of the ultimate beneficiary, the amount to be
taxed, that is, Rs.5.99 crores and the sufficiency of
accumulated profits of MKSEPL in which the assessee
had more than 10% voting power. Accordingly the
Tribunal allowed the Department's appeal.

Aggrieved by the decision of the Tribunal dated
28.1.05, the assessee carried the matter in appeal to the
High Court under Section 260A of the said Act. By the
impugned judgment the High Court held in favour of the
assessee on two counts. According to the High Court,
the assessee had declared the primary facts in the
Returns. According to the High Court, the present case
did not fall under Chapter XIV-B of the said Act.
According to the High Court, this was not the case of
undisclosed income. According to the High Court, this
was a matter of regular assessment. According to the
High Court, none of the Authorities below have held that
the entries in the books of accounts were fictitious.

According to the High Court, full details were disclosed
during the block period in the Returns filed by the
assessee. According to the High Court, all payments
were made by cheque. According to the High Court,
moneys were lent and advanced by MKSEPL to MKF and
MKI in normal course of business. According to the High
Court, the Tribunal had erred in holding that MKF and
MKI were conduits for routing the money from MKSEPL
through the two firms to the assessee; that there was no
evidence in that regard; that the two firms did not have
substantial interest in MKSEPL; that there was no
evidence to show that payments were made by MKSEPL
for the individual benefit of the assessee and to enable
him to purchase 9% RBI Relief Bonds; that CIT(A) was
right in holding that when Rs.26.35 crores was invested
in the above financial year then A.O. had no reason to
treat Rs.5.99 crores as deemed dividend under Section
2(22)(e) and for the above reasons the High Court set
aside the judgment of the Tribunal dated 28.1.05. Hence
this civil appeal.

According to Mr. Mohan Parasaran, learned
Additional Solicitor General appearing for the appellant
(Department), the High Court should not have interfered
with the findings of facts recorded by the Tribunal; that
there was no substantial question of law; that no
perversity in the findings recorded by the Tribunal so as
to warrant interference under Section 260A of the Act;
that the Department had searched the premises, it had
seized the diary "ML-20" which contained entries
subsequently corroborated by cash flow chart which
indicated that money had originated from MKSEPL to the
two firms through which it had gone to the assessee and,
therefore, the Department was right in assessing Rs.5.99
crores as deemed dividend in the hands of the assessee
under Section 2(22)(e). Learned counsel urged that the
five entries discovered in the search represented five
transactions/payments for purchase of 9% RBI Relief
Bonds. These, according to the learned counsel, were not
repayment of loans, they were payments for purchase of
the said bonds during the F.Y. 1999-2000.

On behalf of the assessee (respondent), Mr. N.K.
Poddar, learned senior counsel, submitted that the
impugned block assessment was wholly without
jurisdiction having regard to the fact that the alleged
deemed dividend of Rs.5.99 crores relate to transactions
recorded and reflected in the regular books and tax
records even before the search; that no incriminating
document or evidence was found by the Department
during the search which falsify such transactions entered
into by the assessee in the normal course; that the
expression "undisclosed income" has been defined in
Section 158B(b) of the said Act and since block
assessment was relatable to such evidence recovered
during search in the present case Section 158BB(1) was
not applicable in this case since no such evidence was
recovered during the search. Learned counsel submitted
that Chapter XIV-B was put on the Statute Book to
enable assessment of undisclosed income detected on
evidence found during the search. According to the
learned counsel, the block assessment was intended to
be an assessment in addition to the regular assessment.
Learned counsel submitted that in the present case for
want of such evidence, the Department was not entitled
to make additions on account of deemed dividend to the
tune of Rs.5.99 crores. During the search, according to
the learned counsel, nothing except a cash flow chart
giving details of investments made by the assessee in
purchase of the said Bonds of the value of Rs.26.35
crores was furnished.

According to the learned counsel,
the diary "ML-20" was the ledger copy of the investment
account in 9% RBI Relief Bonds which copy was a print-out from the regular accounts of the assessee; that the
investment of Rs.26.35 crores, reflected in ML-20, was
made by the assessee out of his disclosed funds and through regular
books of accounts, and that the seized
diary did not contained any incriminating information.
Learned counsel urged that in the course of block
assessment proceedings the A.O. directed the assessee to
furnish details as to the source of funds out of which
Rs.26.35 crores was made and when it was explained to
the A.O. that the assessee had made such investments in
9% RBI Relief Bonds out of the moneys withdrawn from
MKF and MKI and that books of accounts maintained
regularly by the said two firms indicated such
withdrawals the A.O. directed the authorized
representatives of the assessee to prepare a statement
indicating the source from which moneys came in the
hands of the two firms and out of which withdrawals
were made by the assessee to make investment in the 9%
RBI Relief Bonds, therefore, according to the learned
counsel, no incriminating material whatsoever was found
in the course of the search which could enable the A.O.
to invoke Section 2(22)(e) of the Act. According to the
learned counsel, in the above circumstance, Chapter XIV-B dealing with block assessment was wrongly invoked by
the A.O.

On the nature of the transactions, learned counsel
urged that during the F.Y. 1999-2000, the assessee had
invested Rs.26.35 crores in the purchase of bonds; that
the said investment was made out of the disclosed
sources through cheques and that the said investment
was mentioned in the bank accounts and in the tax
records of the assessee long before the search. Learned
Counsel urged that the immediate source of investment
was the withdrawal of Rs.26.35 cores from the parners'
capital account with MKF and MKI. It was urged that the
cash flow statement was not an admission on the part of
the assessee and, therefore, it was not open to the
Department to invoke Chapter XIV-B. Learned counsel
submitted that the Tribunal had erred in holding that the
fact that SCPL had a running current account with MKI
in the usual course of business, was irrelevant. Learned counsel
submitted that SCPL had borrowed substantial amounts from MKI and in
January 2000 SCPL repaid Rs.2.79 crores to MKI which were not on behalf
of or for the benefit of the assessee. It was urged that MKI had ever
borrowed money from SCPL at any time. Learned counsel urged that the
Tribunal was wrong in holding that the fact that MKI had never borrowed
money from SCPL, was irrelevant. Learned counsel urged that Rs.2.79
crores were withdrawn by the assessee from his firm styled MKI on
28.1.2000 and such withdrawal was debited by MKI to the capital account
of the assessee.

It was urged that MKSEPL had borrowed substantial
amounts from MKF; and MKSEPL had made repayments to MKF during the F.Y.
1999-2000 against the earlier debt owed by MKSEPL to MKF. Learned
counsel submitted that the assessee had a credit balance of Rs.6.72
crores in his capital account standing in the books of partnership firm
of MKF as on 1.4.1999. Learned counsel urged that the withdrawals made
by the assessee from MKF were only out of his capital account with MKF
and that the said withdrawals were debited by MKF to the capital account
of the assessee. Learned counsel further urged that there was no
evidence on record to show that payments by SCPL to MKI and/or the
payment by MKSEPL to MKF was for the benefit of the assessee.

Learned
counsel submitted that payments were made by each of the two companies,
namely, SCPL and MKSEPL to MKI and MKF respectively in liquidation of
their respective dues owed by each of the two companies to the said two
firms. Learned counsel urged that no payment was ever made by SCPL and
MKSEPL to the assessee. Learned counsel urged that the existence of
reserves in the balance-sheet of MKSEPL in the sum of Rs.55 crores as on
31.3.1999 is wholly irrelevant for the purposes of Section 2(22)(e) of
the Act. Learned counsel urged that similarly the fact that the assessee
owed Rs.8.18 crores to MKI as on 31.3.2000, was wholly irrelevant for
the purposes of Section 2(22)(e) of the Act. Learned counsel submitted
that Section 2(22)(e) had no application in the matter of the above two
facts. Learned counsel urged that the Tribunal failed to appreciate that
the assessee did not hold any shares in SCPL on or after 1.4.1999 and,
therefore, he did not have any interest in SCPL on the dates when
Rs.2.79 crores were repaid by SCPL to MKI.

Learned counsel
contended that the accumulated profits of MKSEPL could not be treated in
law as the accumulated profits of SCPL in spite of the Order dated
5.7.2001 passed by the High Court approving the merger of SCPL with
MKSEPL, even when such merger was made effective from 18.5.98. Learned
counsel submitted that the Tribunal had failed to appreciate that MKSEPL
had not merged with SCPL but it is SCPL which had merged with MKSEPL. As
a result of the said merger the accumulated profits of MKSEPL did not
vest in SCPL. Learned counsel, therefore, submitted that the subsequent
event of the Court's Order dated 5.7.2001 approving merger of SCPL with
MKSEPL can not enable the Revenue to treat the accumulated profits of
MKSEPL as part of the accumulated profits of SCPL. Learned counsel
further submitted that MKF never held any shares in MKSEPL. Learned
counsel urged that Rs.2.04 crores were paid on 11.1.2000 and Rs.75 were
paid on 28.1.2000 by SCPL to MKI. Therefore, according to the learned
counsel, if SCPL wanted to declare dividends it could have done so only
to the extent of accumulated profits in its own hands and since SCPL on
the above two dates could not have declared dividends in excess of its
accumulated profits, the Department was wrong in treating the
accumulated profits of MKSEPL as accumulated profits of SCPL merely
because the merger became effective retrospectively with effect from
18.5.98.

We find merit in
this civil appeal. The companies having accumulated profits and the
companies in which substantial voting power lies in the hands of the
person other than the public (controlled companies) are required to
distribute accumulated profits as dividends to the shareholders. In such
companies, the controlling group can do what it likes with the
management of the company, its affairs and its profits. It is for this
group to decide whether the profits should be distributed as dividends
or not. The declaration of dividend is entirely within the discretion of
this group. Therefore, the legislature realized that though funds were
available with the company in the form of profits, the controlling group
refused to distribute accumulated profits as dividends to the
shareholders but adopted the device of advancing the said profits by way
of loan to one of its shareholders so as to avoid payment of tax on
accumulated profits. This was the main reason for enacting Section
2(22)(e) of the Act.

In the case of
Commissioner of Income-Tax, Madras-I v. L. Alagusundaram Chettiar
(1977) 109 ITR 508, the Madras High Court held that the word "payment"
in the said section means the act of paying and, therefore, in that case
it was held that payment by the company to Karuppiah Chettiar was for
the benefit of the assessee, the Managing Director of the company, L.
Alagusundaram Chettiar, and was therefore assessable as dividend in the
hands of the assessee. In the said judgment it has been held that the
basic test to be applied in such cases is not whether loan given is a
benefit but whether payment by the company to Karuppiah Chettiar was for
the benefit of the assessee who was the Managing Director of the paying
company. Applying the above test to the facts of the present case, we
are of the view that the Tribunal was right in holding, on examination
of the cash flow statement, that MKSEPL had made payments to MKF and MKI
for the benefit of the assessee which enabled the assessee to buy 9% RBI
Relief Bonds in the F.Y. 1999-2000. It is in this sense that the
Tribunal was right in holding that the two firms were used as conduits
by the assessee. It is not in dispute that the assessee had more than
10% of voting power in MKSEPL during the block period. It is not in
dispute that the assessee had substantial interest of about 16% in MKF.
It is not in dispute that the three companies were the controlled
companies. There is one more point which needs to be mentioned. The
timing of so-called repayments by the company to MKF and MKI and the
immediate withdrawal of the funds by the assessee-cum-Director-cum-shareholder-cum-partner
and the timing of investment in purchase of Bonds were around the same
time. Moreover, in MKSEPL the assessee is not only a shareholder having
more than 10% of total voting power, he is also a Director of that
company.

The said company is also a partner in MKF and MKI which
explains why the amount of Rs.5.99 crores was routed by splitting the
said amount into two parts of Rs.2.79 crores and Rs.3.20 crores. In the
present case, the most important aspect, which has not been considered
by the High Court, was that withdrawal of money by the assessee from his
capital account, in the books of MKI, during F.Y. 1999-2000 led to a
debit balance of Rs.8.18 crores as on 31.3.2000. To this extent, the
finding given by the A.O. and by the Tribunal remains unchallenged.
Lastly, on the maintainability of the block assessment, we are of the
view that the Department was right in assessing the said amount as
deemed dividend in the hands of the assessee under Section 2(22)(e) of
the Act. The impugned Assessment Order was passed under Section 158BC.
That assessment originated on account of a search conducted under
Section 132(1) of the Act. In that search the diary "ML-20" was
identified. That identification was the starting point of connected
enquiries resulting in the detection of undisclosed income of Rs.5.99
crores. In other words, undisclosed income, in the nature of deemed
dividend, did not arise from any scrutiny proceedings, tax evasion
petitions, surveys, information received from external agency etc.

The
undisclosed income was detected by the A.O. wholly and exclusively as a
result of a search and, therefore, the Department was right in invoking
the provisions of Chapter XIV-B. There is one more aspect in this
regard. From the facts, indicated above, the Department has established
a sort of circular trading in this case. One of the important features
of circular trading is to route the funds through conduits. In such
cases the picture emerges only after seeing the cash flow statements. In
the present case, ML-20 made the A.O. to hold enquiries and in that
enquiry the cash flow statement emerged, therefore, the Department was
right in invoking the provisions of Chapter XIV-B in the present case.
The five payments had direct co-relation with Rs.5.99 crores paid by
MKSEPL to MKF and MKI and payments by the said two firms to the assessee
who used the said money to buy 9% RBI Relief Bonds. Therefore, the said
payment by the company through the two firms was for the benefit of the
assessee. Therefore, the said funds were not repayment of loans, they
were for purchase of 9% RBI Relief Bonds by the respondent.

As regards the
contention advanced on behalf of the assessee that the accumulated
profits of MKSEPL could not be treated as the accumulated profits of
SCPL in spite of the Order of merger with effect from 18.5.98, we agree
with the view expressed by the A.O. that on merger the accounts of the
two companies had merged and, therefore, the reserves had to be taken on
the basis of merged account. Moreover, the assessee had substantial
interest in MKSEPL right from the inception. Lastly, in the present
case, we are concerned with the block assessment which covers the period
1.4.1990 to 24.8.2000.

Before concluding,
we quote hereinbelow the relevant paragraphs from the judgment of the
Calcutta High Court in the case of Nandlal Kanoria v. Commissioner of
Income-Tax, Central, Calcutta reported in (1980) 122 ITR 405 at p. 415:

"The only question
which remains to be considered is that whether the said company made the
payments of the said sum of Rs. 75,000 and Rs. 4,80,000 to Indira & Co.
for the benefit of the assessee. So far as Rs. 75,000 is concerned it is
found by the Tribunal, though not very clearly, that this amount was
received by Indira & Co. from the said company and the same amount was
given to the assessee by Indira & Co. The Tribunal inferred from the
said facts that this was a payment by the said company meant for the
benefit of the assessee. This conclusion involves two findings of fact,
namely, the factum of payment by the company and the motive or intention
of the company making such payment, namely, a benefit accruing to the
assessee. These are essentially findings of fact and have not been
challenged by the assessee by an appropriate question."
(emphasis supplied)

We also quote
hereinbelow para 19 and para 21 of the judgment of the Bombay High Court
in the case of Commissioner of Income-Tax (Central), Bombay v. P.K.
Badiani reported in (1970) 76 ITR 361:

"19. Now, the
assessee's account for 1st April, 1957, to 31st March, 1958, shows that
there are credits as well as debits. What has to be ascertained is
whether the debits are "loans", so that they can be deemed as dividends.
The account is a mutual, open, and current account. Every debit, i.e.,
every payment by the company to the assessee, may not be a loan. To be
treated as a loan, every amount paid must make the company a creditor of
the assessee for that amount. If, however, at the time when the payment
is made by the company is already a debtor of the assessee, the payment
would be merely a repayment by the company towards its already exisiting
debt. It would be a loan by the company only if the payment exceeds the
amount of its already existing debt and that too only to the extent of
the excess. Therefore, the position as regards each debit will have to
be individually considered, because it may or may not be a loan. The two
basic principles are, that only a loan, which would include the other
payments mentioned in section 2(6A)(e), can be deemed to be dividend and
that too only to the extent that the company has at the date of the
payment "accumulated profits" after deducting therefrom all items
legitimately deductible therefrom.

xxx xxx xxx
21. As regards questions Nos. 3 and 4, Mr. Rajgopal contended that the
debit balance, if any, at the last date of the assessee's accounting
year 1st April, 1957 to 31st March, 1958, should be taken as the amount
to be treated as dividend and as the assessee's account is on the last
day to his credit, no amount can be deemed to be dividend. As already
pointed out, the position has to be ascertained at the date of each
payment by the company to the assessee and this contention must,
therefore, be rejected. If Mr. Rajgopal's contention was to be accepted,
the result would be that if a shareholder borrows a large amount during
the year, but repays it on the last day of the year, it would not be
considered to be a loan, though the facts show that he did borrow a
loan. Such a contradiction of the real fact would result if Mr.
Rajgopal's contention were to be accepted. Mr. Rajgopal further
contended that in any event the highest amount to the assessee's debit
on any day of the year should be the amount to be deemed to be dividend.
This argument, again, ignores the principle laid down by us, that the
position at the date of each payment must be considered. Moreover, there
is another reason and that is that if it were to be so done, it would
not enable the position of the balance of the "accumulated profits"
being taken into account, as more than one shareholder may have borrowed
loans from the company in an account similar to that of the assessee.
All these contentions of Mr.Rajgopal ignore the basic fact that section
2(6A)(e) uses the words "any payment" which means, every payment, and
section 2(6A)(e) requires the determination of two factors, viz.,
whether the payment is a loan and whether at the date when the payment
is made there were "accumulated profits" and that these two factors are
to be correlated and the result must be ascertained at the date of each
such payment." (emphasis supplied)

The above two
judgments indicate that the question as to whether payment made by the
company is for the benefit of the assessee is a question of fact. In
this case, the Tribunal has concluded that the payment routed through
MKF and MKI was for the benefit of the assessee. This was a finding of
fact. It was not perverse. Therefore, the High Court should not have
interfered with the said finding. Further, the above two judgments lay
down that the concept of deemed dividend under Section 2(22)(e) of the
Act postulates two factors, namely, whether payment is a loan and
whether on the date of payment there existed "accumulated profits".
These two factors have to be correlated. This correlation has been done
by the Tribunal coupled with the fact that all withdrawals were debited
in the capital account of the firm leading to the debit balance of
Rs.8.18 crores. The High Court has erred in disturbing the findings of
fact.

For the above
reasons, we set aside the impugned judgment of the High Court.
Accordingly, the appeal stands allowed with no order as to costs.